SNVP Savoy Energy Corp New (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – RESTATEMENT

As disclosed in our Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on September 4, 2012, the Board of Directors of Savoy Energy Corporation (“Savoy” or the “Company”) determined that the consolidated financial statements for the three months ended March 31, 2011 included in our Quarterly Report on Form 10-Q for the period ended March 31, 2011 could no longer be relied upon as a result of errors in such reports.

The Company filed an Amendment on Form 10-Q/A (“Amendment”) on October 10, 2012 to amend its Quarterly Report on Form 10-Q for the three months ended March 31, 2011 (the “Form 10-Q”), as filed with the SEC on July 1, 2011, The Amendment was filed solely for the purpose of restating the Consolidated Financial Statements to correct an error in accounting for certain convertible promissory notes as explained more fully in Notes 1 and 6 of the accompanying notes to consolidated financial statements as well as to expense $10,000 in fees as explained more fully in Note 5 of the accompanying notes to consolidated financial statements, which were originally recorded as a reduction in additional paid-in capital.

The Company has restated its financial statements as at March 31, 2011 and for the three months then ended to reflect:

1) an adjustment to record the initial derivative liability of $37,634 with the corresponding note discount of $30,000 and interest expense of $7,634 for the new convertible note issued on March 7, 2011(the 2011 Note),

2) an adjustment to record the fair value change of the derivative liability from the issuance date of the 2011 Note to March 31, 2011, and the fair value change from December 31, 2010 to March 31, 2011 on the 2010 Notes, resulting in a decrease in the derivative liability and a credit to other expenses of $9,818,

3) an adjustment to record the amortization of the note discounts of $34,389 and

4) a reclassification of $10,000 from reducing additional paid in capital to general and administrative expense. See Note 5.

5) reversing the original entries made where the Company recorded the beneficial conversion feature at a discount to the market value of the common stock.  The discount related to the beneficial conversion feature was valued at $2,258 at inception. For the period ended March 31, 2011, $251 was initially charged to interest expense associated with the amortization of the debt discount. These entries have been reversed in the restated consolidated financial statements.

The cumulative effect of the restatements increased total liabilities by $48,710, increased additional paid-in capital by $42,742 and increased the net loss for the three months ended March 31, 2011 by $41,954 and accumulated deficit by $91,452. 

a)       Balance Sheet

b) Statement of Operations

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Savoy Energy Corporation ("the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Savoy’s annual report filed with the SEC on Form 10-K for the year ended December 31, 2011, on April 16, 2013. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent year 2011 as reported in Form 10-K have been omitted.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company’s consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing and costs associated with its retirement obligations.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.

Fair Value of Financial Instruments

As defined in FASB ASC Topic 820 – 10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 – 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.

As at March 31, 2012, the fair value of cash, accounts receivable, accounts payable and notes payable approximate carrying values because of the short-term maturity of these instruments.

Oil and Gas Properties

The Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.

Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to developed proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of undeveloped properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment.

The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For the Company, asset retirement obligations (“ARO”) relate to the plugging and abandonment of drilled oil and gas properties. The amounts recognized are based upon numerous estimates including future retirement costs; future recoverable reserve quantities and reserve lives; and the credit-adjusted risk-free interest rate.

Ceiling test

In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the value of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties.

Oil and gas properties, not subject to amortization

The amortization of the oil and gas properties not classified as proved begins when the oil and gas properties become proved, or their values become impaired. The Company assesses the realizability of its properties not characterized as proved on at least an annual basis or when there is or has been an indication that an impairment in value may have occurred. The impairment of properties not classified as proved is assessed based on management’s intention with regard to future exploration and development of individually significant properties, and the Company’s ability to secure capital funding to finance such exploration and development. If the result of an assessment indicates that a property is impaired, the amount of the impairment is added to the capitalized costs in its full cost pool and they are amortized over production from proved reserves

Revenue Recognition

Revenues from the sale of oil and natural gas are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured and evidenced by a contract.  For oil sales, this occurs when the customer's truck takes delivery of oil from the operators’ storage tanks.

The Company follows the “sales method” of accounting for oil and natural gas revenue, so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to its ownership in the property.  A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than its share of the expected remaining proved reserves.  

Costs associated with production are expensed in the period incurred.

Stock-Based Compensation

Stock-based compensation expense includes the estimated fair value of equity awards vested during the reporting period. The expense for equity awards vested during the reporting period is determined based upon the grant date fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.

Deferred Taxes

The Company provides for income taxes under Statement ASC 740 Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. The Company’s predecessor operated as entity-exempt from Federal and State income taxes.

ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Earnings per Share of Common Stock

Basic net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the reporting period when they are anti-dilutive, common share equivalents, if any, are not considered in the computation.

Recent Accounting Pronouncements

The Company does not expect recent accounting standards or interpretations issued or recently adopted to have a material impact on the Company’s consolidated financial position, operations or cash flows.

Dividends

Dividends declared on our common stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings will exist after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions; such payments constitute a return of contributed capital rather than earnings and are accounted for as a reduction to paid-in capital.

NOTE 4 - GOING CONCERN

The Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of March 31, 2012, the Company has a working capital deficit of $3,071,982 has generated limited revenues and has an accumulated deficit of $5,187,559. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet operating expenses. The continuation of the Company as a going concern is dependent upon the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's operations.

The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern

NOTE 5 – OIL AND GAS PROPERTIES

During June 2010, the Company entered into an option agreement with a shareholder and working interest participant in certain oil and gas properties located in Gonzales County, Texas to allow the shareholder to put their interest in the properties to the Company.  Pursuant to the option agreement, Savoy agreed to issue 2,640,000 shares of common stock to the shareholder, together with future monthly payments of $5,000 per month to the shareholder until the holding period lapses and the restrictive legend can be removed from the face of the share certificate.   Upon the restriction removal, the monthly payment will cease and the shareholder has the option to assign their interest in the oil and gas properties to Savoy.   The 2,640,000 shares of common stock have not been issued as of the date of this filing. During the three months ended March 31, 2011, the Company paid $10,000 to the shareholder under the agreement which is included in general and administrative expenses for the three months ended March 31, 2011.

In February 2011, the Company sold its 52.5% working and revenue interest and the support equipment on the Zavadil No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $65,000 and forgiveness of payables in the amount of approximately $25,000. The proceeds associated with the support equipment and forgiveness of payable totaling approximately $79,000 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling approximately $11,000 was accounted for as a reduction of capitalized costs, with no gain or loss recognized.

In March 2011, the Company sold a 25.75% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of approximately $37,000. The proceeds associated with the support equipment totaling approximately $14,000 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling approximately $23,000 was accounted for as a reduction of capitalized costs, with no gain or loss recognized.

NOTE 6 – NOTES PAYABLE

On September 24, 2008, Plantation Exploration, Inc. entered into a financing agreement with Oil Investment Leases, Inc. (OIL) for cash advances totaling $290,000. On January 27, 2009 and May 4, 2009, the Company amended the September 24, 2008 agreement with OIL for advance cash payments under the demand loan and to assign the debt from Plantation Exploration to Savoy. On December 22, 2011, the outstanding balance of advances from OIL of $282,500 was sold, transferred and assigned by OIL to ASL Energy Corp. (ASL). On March 30, 2012 ASL assigned sold and transferred (the Assigned OIL Note) the OIL Note to Carebourn Partners, LLC (“Carebourn”). As of March 31, 2012, the outstanding balance of the Assigned OIL Note was $282,500.

On March 22, 2010 (the 1 ^st March 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest was payable at maturity on November 30, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature. The convertible promissory note bears interest at 5% per annum and matured April 10, 2011, at which date the $40,000 and any accrued interest is payable or convertible at a price of $0.01 per share. The outstanding principal balance of the convertible promissory note at March 31, 2012 was $24,500, which is in default and classified as current debt. The Company evaluated the terms of the amendment to the note and concluded that the amended note did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since the amended note was convertible into shares of common stock at a discount to the market value of the common stock.  The discount related to the beneficial conversion feature was valued at $12,000 based on the intrinsic value of the discount.  The discount was fully amortized at March 31, 2011 due to the short-term nature of the Note.    For the period ended March 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount.

On March 22, 2010 (the 2 ^nd March 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest was payable at maturity on November 30, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature and increased the face amount to $41,500.  The convertible promissory note bears interest at 5% per annum and matured April 10, 2011, at which date the $41,500 and any accrued interest is payable or convertible at a price of $0.01 per share. The outstanding balance of the convertible promissory note at March 31, 2012 was $12,182, which is in default and classified as current debt. The Company evaluated the terms of the amendment to the note and concluded that the amended note did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since the amended note was convertible into shares of common stock at a discount to the market value of the common stock.  The discount related to the beneficial conversion feature was valued at $12,000 based on the intrinsic value of the discount.  The discount was fully amortized at March 31, 2011 due to the short-term nature of the Note.    For the period ended March 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount.

On April 21, 2010 (the April 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum. The loans are unsecured and the principal and accrued and unpaid interest matured on December 31, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature. The convertible promissory note bears interest at 5% per annum and matured April 10, 2011, at which date the $40,000 and any accrued interest is payable or convertible at a price of $0.01 per share. The outstanding balance of the convertible promissory note at March 31, 2012 was $30,000, which is in default and classified as current debt. The Company evaluated the terms of the amendment to the note and concluded that the amended note did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since the amended note was convertible into shares of common stock at a discount to the market value of the common stock.  The discount related to the beneficial conversion feature was valued at $12,000 at based on the intrinsic value of the discount.  The discount was fully amortized at March 31, 2011 due to the short-term nature of the Note.    For the period ended March 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount.

On October 25, 2010, Asher Enterprises, Inc. (“Asher”) advanced $63,000 to the Company under the terms of a convertible promissory note (the “October Note”).  On December 21, 2010, Asher advanced $32,500 to the Company under the terms of a convertible promissory note (the “December Note”). The October Note and the December Note together are referred to as the 2010 Notes. The 2010 Notes bear interest at 10% per annum and matured on their nine month anniversary at which date the principal amounts and any accrued interest is payable.  The 2010 Notes have a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date.   The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the 2010 Notes.

The Company analyzed the conversion feature of the Asher Notes and the Carebourn Notes (see below) for derivative accounting consideration under ASC 815-15 “ Derivatives and Hedging ” and determined that the embedded conversion feature should be classified as a liability due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.  ASC 815-15 requires that the conversion features are bifurcated and separately accounted for as an embedded derivative contained in convertible debt.  The embedded derivative is carried on the Company’s balance sheet at fair value.  Any unrealized change in fair value, as determined at each measurement period, is recorded as a component of the income statement and the associated carrying amount on the balance sheet is adjusted by the change.  The Company values the embedded derivative using the Black-Scholes pricing model.  

Upon issuance of the October Note, the fair value of $65,625 was recorded as a derivative liability.  A discount to the convertible debt principal was recorded in the amount of $63,000 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $2,625 was recorded as interest expense in October 2010. The debt discount was amortized over the life of the note, and $15,167 and $47,833 was included in interest expense for the years ended December 31, 2010 and 2011, respectively. As of December 31, 2011, the balance of the October Note was $12,300 and the fair value of the derivative related to the October Note was $14,022. During the three months ended March 31, 2012 Asher converted the remaining balance of $12,300 and $2,520 of accrued and unpaid interest into 29,612,891 shares of common stock.

Upon issuance of the December Note the fair value of $34,656 was recorded as a derivative liability. A discount to the convertible debt principal was recorded in the amount of $32,500 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $2,156 was recorded as interest expense in December 2010. The debt discount is amortized over the life of the note, and $1,204 and $31,296 was included in interest expense for the years ended December 31, 2010 and 2011, respectively. As of December 31, 2011, the balance of the December Note was $32,500 and the fair value of the derivative related to the December Note was $37,050. During the three months ended March 31, 2012 Asher converted $5,000 of principal of the December Note into 7,462,687 shares of common stock. As of March 31, 2012 the balance of the December Note was $27,500 and the fair value was $111,100 which resulted in a recorded net loss on the fair value of derivative liability of $79,750 in the accompanying consolidated statements of operations.  

The fair value of the derivative on the 2010 Notes on their date of their respective issuances and combined as of December 31, 2011 and March 31, 2012 was determined using the Black-Scholes option pricing model with the following assumptions:

On March 7, 2011 (the “March 2011 Note”), June 22, 2011 (the “June 2011 Note”) and August 23, 2011 (the “August 2011 Note”) the Company issued convertible promissory notes of $30,000, $11,000 and $14,500, respectively, to Asher, under the same terms and conditions as the 2010 Notes (as amended), other than the August 2011 Note defines the Variable Conversion Price as 45% of the average of the three (3) lowest trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. On July 1, 2011 Asher advanced the proceeds of the June 2011 Note directly to various creditors of the Company. In August 2011, Asher advanced $14,000 directly to creditors of the Company and $500 to the Company. The March 2011 Note, June 2011 Note and August 2011 Note are referred to as the 2011 Notes.

The outstanding principal balance at December 31, 2011 and March 31, 2012 of the March 2011 Note, the June 2011 Note and the August 2011 Note was $30,000, $11,000 and $14,500 respectively.

Upon issuance of the March 2011 Note the fair value of $37,634 was recorded as a derivative liability. A discount to the convertible debt principal was recorded in the amount of $30,000 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $7,634 was recorded as interest expense in March 2011. The debt discount is amortized over the life of the note, and $2,556 was included in interest expense for the three months ended March 31, 2011. As of December 31, 2011 the fair value of the derivative related to the March 2011 Note was $34,200. On March 31, 2012 the fair value of the derivative related to the March 2011 Note was $121,200 which resulted in a recorded net loss on the fair value of derivative liability of $87,000 in the accompanying consolidated statements of operations.

Upon issuance of the June 2011 Note the fair value of $13,945 was recorded as a derivative liability. A discount to the convertible debt principal was recorded in the amount of $11,000 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $2,945 was recorded as interest expense in June 2011. The debt discount is amortized over the life of the note, and $3,666 was included in interest expense for the three months ended March 31, 2012. As of December 31, 2011 the fair value of the derivative related to the June 2011 Note was $15,290. On March 31, 2012 the fair value of the derivative related to the June 2011 Note was $44,440 which resulted in a recorded net loss on the fair value of derivative liability of $29,150 in the accompanying consolidated statements of operations.

Upon issuance of the August 2011 Note the fair value of $40,278 was recorded as a derivative liability. A discount to the convertible debt principal was recorded in the amount of $14,500 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $25,778 was recorded as interest expense in August 2011. The debt discount is amortized over the life of the note, and $4,833 was included in interest expense for the three months ended March 31, 2012, respectively. As of December 31, 2011 the fair value of the derivative related to the August 2011 Note was $25,133. On March 31, 2012 the fair value of the derivative related to the August 2011 Note was $67,989 which resulted in a recorded net loss on the fair value of derivative liability of $42,856 in the accompanying consolidated statements of operations. The unamortized discount on the August 2011 Note as of March 31, 2012 is $2,846.

The fair value of the derivative of the 2011 Notes on their respective dates of issuance, on December 31, 2011 and March 31, 2012 was determined using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes models were valued with the following inputs:

(6) Expected dividends - Management estimated the dividend yield at 0% based upon its expectation that there will not be earnings available to pay dividends in the near term.

On June 22, 2011, the Company agreed to amend the conversion price of the 2010 Notes, the March 2011 Note and the June 2011 Note to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 50% of the quoted market price for the Company’s common stock using the average of the lowest three (3) trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. 

The Company evaluated the modification and concluded that the modification was not an extinguishment of the original debt; as a result, no gain or loss was recognized upon modification and there was not a significant difference between the carrying value of the debt prior to modification and the fair value of the debt after modification.

On September 9, 2011, the Company entered into a promissory note in the amount of $96,499 with its Chief Executive Officer and Director for amounts previously owed and accrued to Bertagnolli (the “Bertagnolli Note”). The note bears interest at the rate of 8% per annum and is payable on demand. Any amounts not paid when due bear interest at the rate of 15% per annum until paid in full. During the year ended December 31, 2011, the Company made repayments totaling $20,000. During the three months ended March 31, 2012 the Company agreed to increase the loan by $45,000 for services performed and also reclassified $45,000 from previously accrued amounts due Bertagnolli to the Bertagnolli Note. On March 30, 2012 $135,000 of the Bertagnolli Note was assigned (the Assigned Bertagnolli Note) sold and transferred to Carebourn pursuant to a Purchase and Assignment Agreement (the “PAA”). The outstanding remaining principal balance of the Bertagnolli Note at March 31, 2012 was $31,499.

Also on September 9, 2011, the Company entered into a convertible promissory note in favor of a third party (the ASL Note) in the amount of $105,000, which evidenced a $100,000 bonus and $5,000 of expenses incurred by the third party in contemplation of a management agreement. The convertible note is payable on demand, accrues interest at the rate of 8% per annum (15% in the event of a default) and is convertible, together with accrued and unpaid interest thereon, at the option of the third party, into shares of the Company’s common stock at a conversion price of $0.002 per share. The Company also agreed that the third party would earn an additional $100,000 bonus in the event that (a) the Company adopted an asset purchase agreement, share exchange agreement, plan of merger or consolidation, pursuant to which the Company’s shareholders held less than 50% of the voting stock of the resulting entity post transaction, (b) the Board of Directors’ approved the sale of substantially all of the assets of the Company, or (c) voting control of the Company was acquired by any person other than the current control person of the Company ((a) through (c), a “Restructuring”); that the third party would be paid a bonus of $0.20 for every $1.00 of reduction of liabilities (including contingent liabilities) of the Company that the third party is able to affect during the term of a Management Agreement dated September 9, 2011, which has a term of 90 days and automatically renews for additional one-month periods thereafter; and to issue the third party 1% of the Company’s fully-diluted shares of common stock following any Restructuring. The Company also agreed to indemnify the third party against any liability it may have in connection with the services rendered by the third party pursuant to the Management Agreement or the Company in general and to pay the third party liquidated damages of $50,000 in addition to such indemnification, in the event that the third party becomes party to any claim as a result of the services provided under the Management Agreement or the Company in general.

The Company evaluated the initial terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature.

In connection with the Company’s entry into the convertible note, the Company entered into a security agreement with the third party and provided the third party a first priority security interest in all of the Company’s assets to secure the repayment of the convertible note.

Effective November 28, 2011, the Company agreed to amend the aforementioned note to increase the principal amount to $109,750. On March 30, 2012 $65,000 of the ASL Note (the Assigned ASL Note) was assigned, sold and transferred to Carebourn. The outstanding principal balance of the ASL Note at March 31, 2012 was $44,750.

As of March 31, 2012 the Company owed Carebourn $482, 500; comprised of $282,500 of the Assigned OIL Note, $135,000 of the Assigned Bertagnolli Note and $65,000 of the Assigned ASL Note (together the Carebourn Notes). Upon transfer of the Carebourn Notes, the Company determined the fair value of the Carebourn Notes was $2,188,138 and was recorded as a derivative liability. A discount to the convertible debt principal was recorded in the amount of $482,500 and the difference between the initial recording of the derivative liability and the debt discount in the amount of $1,705,638 was recorded as interest expense in the three months ended March 31, 2012. The debt discount is amortized over the life of the note, and $2,681 was included in interest expense for the three months ended March 31, 2012. As of March 31, 2012 there remains a discount on the Carebourn convertible Note of $479,819 that will be amortized over the remaining term of the Carebourn note.

A summary of the derivative liability balance as of December 31, 2011 and March 31, 2012 is as follows:

A summary of notes payable balances as of December 31, 2011 and March 31, 2012 follows:

NOTE 7 – RELATED PARTY TRANSACTIONS

From time to time, the Company receives cash advances from related parties, including stockholders and their affiliates, to cover operating expenses. The advances do not bear interest and are due upon demand. During the three months ended March 31, 2012, the Company received cash advances of $200.

NOTE 8 - COMMON STOCK

On January 30, 2012 the Company issued 5,263,158 shares of common stock in exchange for the conversion of $1,000 of the October 2010 Note.

On February 9, 2012 the Company issued 5,217,391 shares of common stock in exchange for the conversion of $1,200 of the October 2010 Note.

On February 28, 2012 the Company issued 5,400,000 shares of common stock in exchange for the conversion of $2,700 of the October 2010 Note.

On March 9, 2012 the Company issued 6,875,000 shares of common stock in exchange for the conversion of $4,600 of the October 2010 Note and $900 of accrued and unpaid interest on the October 2010 Note.

On March 22, 2012 the Company issued 6,857,342 shares of common stock in exchange for the conversion of $2,800 of the October 2010 Note and $1,620 of accrued and unpaid interest on the October 2010 Note.

On March 22, 2012 the Company issued 7,462,687 shares of common stock in exchange for the conversion of $5,000 of the December 2010 Note.

PREFERRED STOCK

Effective December 5, 2011, the Board of Directors approved the filing of a Certificate of Designations establishing the designations, preferences, limitations and relative rights of the Company’s Series A Preferred Stock (the “ Designation ”). The Designation allows the Board of Directors in its sole discretion to issue up to 1,000 shares of Series A Preferred Stock. On December 5, 2011 1,000 shares of Series A Preferred Stock Shares were issued Mr. Bertagnolli, for services valued at $1,000. The preferred shares have the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote.  The Series A Preferred Stock will be entitled to this 51% voting right no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future (the “ Super Majority Voting Rights ”).  Additionally, the Company cannot adopt any amendments to the Company’s Bylaws, Articles of Incorporation, as amended, make any changes to the Designation, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock; however, the Company may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designations that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.

NOTE 9 – COMMITMENTS, CONTINGENCIES AND LITIGATION

On July 27, 2010, the Company entered into a new Employment Agreement with Mr. Bertagnolli to serve as the Company’s President and Chief Executive Officer.  The Agreement, which replaces and supersedes the prior Employment Agreement, is effective as of June 1, 2010 and has a term of two (2) years from the effective date.  Unless terminated within one year of its expiration, the Agreement is automatically renewed for additional terms of one year each.  It provides for a base salary of $15,000 per month together with certain prerequisites and annual grants of employee stock options at the discretion of the Company’s board of directors. 

The Company’s Employment Agreement with Arthur Bertagnolli provides for certain compensation and benefits based on the Company’s achievement of specified milestones.  As of March 31, 2012, none of those milestones have been achieved.  Under certain circumstances, Mr. Bertagnolli is also entitled to an additional payment upon sale of the Company.

NOTE 10- SETTLEMENT OF LAWSUIT

On March 19, 2010, a lawsuit was filed against the Company by Panos Industries, LLC seeking damages “…in excess of $50,000” based upon monies which the Plaintiff claims were advanced by Plaintiff on behalf of the Company. The Company filed an answer to the complaint denying the allegations stated therein and a Counterclaim against the Plaintiff. On January 19, 2012, the parties mutually agreed to dismiss the suit. The Company previously recorded a liability of $151,003 that has now been reversed in the accompanying financial statements.